A key issue for technology companies is finding a market for their innovations. Necessity may be the mother of invention, but small technology companies often come unstuck when they discover that although customers exist who rave about their latest product, they are not buying it in the numbers required to justify its development costs. AIM is littered with such technology businesses, but hopefully OMG, which stands for Oxford Metrics Group, will not be one of them.

OMG – quoted on AIM since April 2001 – has traditionally specialised in developing software and hardware for ‘motion capture’ systems. The group has used this technology for applications in the film industry (to help with visual effects), life sciences (to analyse the movement of people with disabilities) and in the workplace (for ergonomics and human factors engineering).

A problem for OMG has been the limited potential size of the markets it has historically addressed. For example, the group – which posted revenues of £14.2 million last year – is already the dominant player in the market for motion capture systems as used by film and television studios.

This problem meant OMG’s bottom line would suffer severely if just a few customers delayed decisions to buy the group’s systems. This was last seen in the first half of 2005, when orders from the US (OMG’s largest market) slowed. But the company also suffered a loss in 2002 after an 18 per cent decline in revenues that the group blamed on a worldwide drop in business confidence.

To counter the dependence in the sectors mentioned above, it decided to radically diversify its activities. Led by new chief executive Nick Bolton (appointed in May 2005), the group aimed to identify opportunities that had market potential well above the combined markets of OMG’s existing products and where it could expect to achieve dominance.

As well as this, Bolton – who has a manufacturing background – has been modernising the group’s production management system. Talking to Growth Company Investor, he explained that he aims to bring ‘a commercial edge to everything OMG does’.

This strategy helped to bring about a strong second half last year, producing a full-year pre-tax profit of £690,000 despite the H1 2005 loss of £549,000. And the strong performance has continued into this year, with H1 2006 pre-tax profits coming in at £1.2 million on turnover up by 71 per cent to £8.2 million.

One new area for the group is defence: OMG has a relationship with defence technology group QinetiQ and is working on image processing for unmanned aerial vehicles (a significant growth area in the defence sector). Another new arena is the ‘geospatial vision’ market, where OMG is conducting pilot studies into using its imaging technology to locate and record the positions of roadside assets for such customers as highways agencies, utility companies and mapping organisations.

According to house broker Evolution Securities, the group is set to deliver total pre-tax profits of £1.6 million this year, rising to £2 million in 2007. These figures translate to earnings per share of 2.2p and 2.5p respectively, so the share price currently stands at 16.1 times prospective earnings.

This is not expensive for a technology share, although some short-term weakness cannot be ruled out as the shares have enjoyed a strong run over the past few months. Speculative buy.